Gregg McClymont: What does good look like post pension freedoms?


The New Year is always a time for predictions. So here goes. If automatic enrolment was 2014’s theme and 2015 dominated by the first cohorts with access to pensions freedom and choice, this year is set to be the year in which defining value for money and determining “good outcomes” enters stage right.

Trustees and independent governance committees are manfully working to develop models with respect to the former. This is hard enough. Harder still is defining good outcomes in a UK retirement system encompassing millions of individuals and families with vastly divergent resources and investable assets.

One size will not fit all. The range of appropriate outcomes for high-net-worth individuals with significant non-pension assets is likely to be much wider (given a greater capacity to absorb risk) than for savers depending on a modest defined contribution pot to supplement their basic state pension entitlement.

Defining good outcomes used to be easier when drawdown was only available to high-net-worth retirees. This policy compressed the range of outcomes and risks in the mass market. An income was guaranteed for life, even if it was sub-optimal, for most people.

Now the risk landscape has utterly changed, with the end of compulsory annuitising and access from age 55. A good outcome to a 55 or 60-year-old could mean having enough money to pay off their mortgage or debts, or fund their children through university. However, as that person ages, their idea of a good outcome may change and they may regret having spent their savings in early retirement.

Whether retirees choose to buy an annuity, go into drawdown or do something else entirely, they will consider this part of their pension savings journey.

No wonder attention is turning to (re)defining good outcomes. To date, the Turner Pension Commission’s emphasis on replacement rates has held the field.

These rates start high for low earners and taper to a target replacement rate of 50 per cent for those earning over £51,098. As a rule of thumb, Turner suggested two-thirds of final salary as a target retirement income for life.

Some now see this as too ambitious, too generous or just too plain blunt a metric. The influential Institute for Fiscal Studies emphasises the necessity of taking full account of the financial differences between working and retirement.

Retirees do not face many of the same costs as working people: for example, they do not pay National Insurance, do not have to provide for children or, of course, save for a pension. Financial geography must also be taken into account since living costs vary widely between regions and cities.

Doubtless the IFS is right. But a more fundamental question begins to take shape. If the exercise of individual freedom and choice in itself is the object of government policy, how far can the industry hope to develop good outcomes rules of thumb at all?

Gregg McClymont is head of retirement savings at Aberdeen Asset Management